Morningstar - Q2 2023 - 17

Dispatches
Global Briefs
Macro Trading
Systematic Trend
Opportunistic
TRENDS
Diversifier
An Uphill Battle for Active Large-Growth Funds
A recent Morningstar Research Services report,
Event-Driven
Equity Market-Neutral
" The Big Shortcoming, " explores how the largegrowth
Morningstar Category has changed over
the past decade and examines why active
managers haven't on the whole kept up with the
standard category benchmark, the Russell
1000 Growth Index.
One significant reason: the phenomenal results of
a narrow cohort of huge benchmark constituents.
A large portion of the Russell 1000 Growth Index's
14% annualized total return from 2013 to 2022
derived from just four behemoths: Apple AAPL,
Microsoft MSFT, Amazon.com AMZN, and
Alphabet GOOGL. The index became more
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top-heavy as these companies dominated, which
presented challenges for funds that couldn't make
similarly large bets due to diversification rules.
A manager bullish on each of those stocks couldn't
overweight one without underweighting another.
A top-heavy index is tough to beat when its largest
constituents are also its best-performing ones.
As these and other communication-services and
technology stocks became an increasingly large
part of the benchmark over the past decade,
large-growth funds followed suit. At the start of
the period, the category's median combined stake
was 19.5% of assets. It peaked at 48.2% in
December 2021.
Combined Technology and Communication Services Sector Weighting
100%
75
50
25
2013
Source: Morningstar.
2014
2015
2016
2017
2018
2019
2020
2021
2022
Maximum
Russell 1000
Growth
Category
Average
3rd
2nd
Quartile
Quartile
Benchmarks
Morningstar US Core Bond Index
Morningstar Global Markets Index
As the category's typical stake increased, so did
the percentage of funds that hewed closely
to that norm. Granted, in 2022's tough market,
active managers expressed a wide range of views:
Exposure ranged from zero to 78% across the
category. But overall, managers have become less
likely to stray far from the norm. The exhibit
sorts active large-growth funds into quartile by
the size of their tech and communications
stakes. Those funds in the middle two quartiles
clustered more closely to the median in 2022
than ever. But that median regularly trailed
the benchmark's stake. The past decade provided
stock-pickers few paths to outpacing the
top-heavy index.
ETFs Elevate Active
Management
AMERICAS
United States
The fund landscape has changed dramatically
over the past several decades. The development of
the index-tracking mutual fund gave investors
access to the stock market at a much lower
price than many actively managed funds. In most
cases, those lower fees were enough, on
their own, to deliver better long-term performance.
Then the exchange-traded fund came along
in the 1990s, a structure that was well suited to
index-tracking funds and that improved
tax efficiency.
Investors have clearly latched on to those
advantages. Index-tracking ETFs exploded in
popularity over the past decade, while actively
managed mutual funds have languished.
The latter have bled money for almost eight
straight years, while passively managed
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17
https://www.morningstar.com/stocks/xnas/aapl/quote https://www.morningstar.com/stocks/xnas/msft/quote https://www.morningstar.com/stocks/xnas/amzn/quote https://www.morningstar.com/stocks/xnas/googl/quote http://www.morningstar.com/products/magazine
Morningstar - Q2 2023

Table of Contents for the Digital Edition of Morningstar - Q2 2023
